Too Many Credit Checks: Why It Can Hurt Your Credit Score

Yes, having too many credit inquiries within a short period can indeed negatively impact your credit score. To understand why, it’s important to first grasp what a credit inquiry is and the different types that exist.

A credit inquiry, often called a “credit check” or “credit pull,” occurs when a lender or service provider requests to view your credit report from one or more of the major credit bureaus (Equifax, Experian, and TransUnion). These inquiries are recorded on your credit report and can be categorized as either “hard” or “soft” inquiries.

Soft inquiries typically happen when you check your own credit, when employers perform background checks, or when companies pre-approve you for credit offers. Soft inquiries do not affect your credit score. They are essentially for informational purposes and are not seen as a negative signal by lenders.

Hard inquiries, on the other hand, can impact your credit score. These occur when you apply for new credit, such as a credit card, loan (auto, mortgage, personal), or even when you apply for some types of leases or services that require a credit check. It’s the accumulation of these hard inquiries in a short timeframe that raises a red flag and can potentially lower your score.

The reason multiple hard inquiries in a short period can be detrimental is that they can be interpreted by lenders as a sign of increased financial risk. Credit scoring models, like FICO and VantageScore, are designed to predict the likelihood of you repaying debt. When you have numerous hard inquiries, especially if they are for different types of credit within a short span, it can suggest to lenders that:

• You are desperately seeking credit: Applying for multiple credit products in a short time might indicate you are facing financial difficulties and are trying to access credit to cover expenses or debts. Lenders may perceive this as a higher risk of default.
• You are taking on too much debt: Even if you are not in financial trouble, applying for several credit lines simultaneously suggests you are increasing your overall debt burden. Lenders might be concerned about your ability to manage and repay all this new debt effectively.
• You are engaging in “credit-seeking behavior”: From a statistical perspective, individuals who are actively seeking credit are often considered riskier borrowers than those who are not. The act of applying for credit, even if you are approved, can be seen as a slight increase in risk.

Think of it like this: Imagine you are a lender. If you see someone has applied for five different credit cards and two car loans in the last month, you might wonder why. Are they suddenly facing a financial emergency? Are they planning to take on a lot of new debt they might struggle to repay? This uncertainty makes them appear as a potentially higher-risk borrower.

It’s important to note that the impact of hard inquiries is generally modest and temporary. A single hard inquiry will usually have a small effect, and the negative impact diminishes over time. Most credit scoring models primarily consider inquiries within the last 12 months, and the effect of inquiries older than that is minimal or non-existent. Furthermore, the impact of multiple inquiries is more pronounced when they are for different types of credit in a very short period (like within a few weeks).

However, there’s a crucial exception to this rule: rate shopping. Credit scoring models recognize that consumers often shop around for the best rates when applying for loans like mortgages, auto loans, or student loans. To accommodate this, they typically treat multiple inquiries for the same type of loan within a specific timeframe (usually 14 to 45 days, depending on the scoring model) as a single inquiry. This allows you to compare offers from different lenders without being penalized for each application, as long as you do your rate shopping within that window.

In summary, while a few hard inquiries spread out over time are unlikely to significantly damage your credit score, applying for numerous credit products in a short period can be interpreted negatively by lenders and potentially lower your score. It’s wise to be mindful of how often you apply for new credit and to understand the difference between hard and soft inquiries to protect your credit health. If you are rate shopping for a loan, remember to do so within the designated timeframe to minimize the impact of multiple inquiries.